DeFi projects without decentralized governance? What’s the point?

The role of governance in the booming decentralized finance industry is a nascent one, and there are ongoing conversations from key figures in the industry around its purpose and what governance may look like in the future.

Sam Bankman-Fried of FTX recently shared that his firm’s involvement in DeFi will be “motivated by short-term profits and is not seeking to have a long-term impact in protocols via governance.” In doing so, he argued that he’s simply using DeFi protocols for their intended purposes.

This is not necessarily the case. Some mining programs are designed this way, and Bankman-Fried is playing by the rules. If the project doesn’t want this kind of involvement, then the project should design its program accordingly.

Decentralized governance is one of DeFi’s key missions

DeFi hopes to create an open financial system that can be accessible by anyone in the world. Governance tokens are usually designed to fulfill two purposes. First, projects use them to decentralize decision making. The more people involved — as the logic goes — the less likely an attack or abuse by a single party can occur.

To achieve the first goal, the tokens are usually also designed to incentivize holders to participate and make beneficial decisions for the DeFi protocol. This way, governance tokens can also be likened to the traditional shareholding system in corporations, which is essential to the success of capitalism by incentivizing shareholders to lend capital and govern a company out of pure self-interest.

Because one goal is to decentralize token holders, the concentration of governance tokens held by a few holders is said to be a problem. However, in the early stages of a project, it can be essential.

The centralization of decision making allows projects to move faster and pivot. For MakerDAO, for example, it was easier to vote on introducing new collateral assets when its Dai stablecoin moved too far from its peg.

But in the long run, when there is wide…

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